How Italy Beat the World to a Smarter Grid
But with billions of dollars on the line, policymakers don't want to make costly mistakes. Many of them are thus eyeing the remarkable experience of Italy, which in less than a decade has become the surprising world leader in the development of a smarter electrical grid. Some 85% of Italian homes are now outfitted with smart meters—the highest percentage in the world and more such devices than exist in the whole of the U.S. Utilities worldwide, such as San Francisco's PG&E (PCG) and Florida's FPL Group (FPL), are eager to learn how Enel pulled off its smart meter revolution.
Back in 2001, Enel (ENEI.MI)—the country's dominant utility—started a five-year program to install smart meters across its customer base of 40 million homes and businesses. "We wanted to improve efficiency, create higher margins, and help customers reduce their energy bills," says Livio Gallo, Enel's director of infrastructure and networks, who oversaw the smart meter rollout. Another motivation, according to outside experts, was to throttle rampant power theft and other forms of fraud.
Time-of-Day Pricing InfoBy 2006, Enel had invested $3 billion in the initiative, which included meters of its own design, based on technology from San Jose (Calif.) based Echelon (ELON), that send usage readings automatically to the central office and display time-of-day pricing to customers. The Italian utility can now collect customer data and manage its energy network remotely, instead of sending out costly technicians. And improved data on consumers' electricity habits permit Enel to run its power plants more efficiently. All told, the utility says it is reaping annual cost savings of $750 million from the new technology—allowing it to recoup the infrastructure investment in just four years.
Meanwhile, the introduction of smart meters has given Enel customers greater control over their energy bills. Typically, the meter is installed in a convenient place in the home—say, in a kitchen cupboard or the laundry room. When electricity prices are high, for instance during the peak evening period or on cold winter nights, the smart meter informs household members of higher rates, allowing them to alter their habits (such as postponing a load of laundry until the next morning) to avoid big charges. Analysts figure that attentive Enel customers have been able to cut their bills by as much as one-half by keeping close tabs on energy prices and usage.
"Smart meters give customers more control over how much they want to spend," says Michael Pollitt, assistant director of the Electricity Policy Research Group at the University of Cambridge's Judge Business School.
The dual benefits for companies and consumers explain why politicians have embraced the technology. According to ABI Research, the worldwide installed base of smart meters will more than triple from 2008 to 2014, to 180 million units. The EU, with its population nearing 500 million and mandatory installation targets for 2020, represents 64% of that figure, or 115 million smart meters. North America is No. 2 at 45 million units, with Asia Pacific and Latin America third and fourth, respectively. Among the leading makers of smart meters today are U.S. companies such as General Electric (GE), Itron (ITRI), and Sensus Metering Systems, as well as Luxembourg's Elster and Switzerland's Landis+Gyr.
Whirlwind InstallationWith so many smart meters to be installed in the near future, Enel's Gallo figures other utilities can learn a lot from the Italian experiment. First of all, he recommends that companies roll out the technology as quickly as possible. Instead of gradual installation, a whirlwind program, often in just three or four years, helps achieve a fast return on investment. That may involve higher up-front costs, but it gives utilities quick access to consumer data and greater control over their energy network, which can lead to ancillary cost savings. "In the long run, it's more efficient than installing smart meters over a decade," says Gallo.
The other lesson from Enel's smart meter rollout is more basic: focus on the customer. When the company first started installing the technology, recalls Gallo, management spent time educating the public about its benefits. That involved town hall meetings and discussions with consumer protection groups, which had voiced concerns over the collection of data about individuals' energy habits. While assuaging people's doubts, Enel was able to explain that most customers' bills would go down because of smart meters—helping increase customer loyalty.
Yet despite the cost savings, consumer advocates still caution that not everyone will benefit from smart meters. Vulnerable groups, particularly the poor and elderly, may become victims to price spikes. And privacy concerns that utilities could use the data collected through smart meters without the permission of customers still dog many potential rollouts.
Yet Enel's successful adoption of smart meters shows the benefits that the technology has to offer, both to companies and to their customers. Says Rick Hanks, smart meter practice leader for Britain and Ireland at consultancy Accenture (ACN): "Smart meters are a vital part as everyone looks to become more energy-efficient."